Fed Chairman Powell: Banks can legally conduct encryption business, do risk control well, and learn from SVB lessons

The U.S. Senate recently introduced the "Genius Act" in an attempt to establish a regulatory framework for Crypto Assets, with a focus on the issuance of Crypto Assets being regulated by individual states rather than a unified federal agency. During a hearing on 2/16, Democratic House Representative Stephen Lynch expressed concerns to Federal Reserve Chairman (FED) Jerome Powell about the potential for the encryption market to expand further, potentially impacting traditional banking systems. Lynch specifically pointed out the highly speculative and volatile nature of Crypto Assets, citing past sudden collapses. He warned that if a major encryption institution were to collapse in the future, it could have serious repercussions for banks.

Powell said banks can legally conduct encryption business, and risk management is critical

Powell said that there are currently two main situations in the relationship between banks and Crypto Assets.

Banks, as service providers of encryption enterprises, such as providing deposit or payment systems.

Banks conduct Crypto Assets-related businesses on their own, such as asset custody.

He emphasized that the FED will not prevent banks from cooperating with legitimate encryption businesses, but banks must fully understand the risks, and regulators must also ensure that banks have appropriate risk management measures in place.

Powell stated that the Fed's attitude towards encryption business is "cautious but not overly intrusive," especially after experiencing events such as the FTX collapse, regulatory agencies' reactions should not be too extreme, otherwise it may hinder the normal business development of banks. He also mentioned that many banks regulated by the Fed are indeed involved in encryption business, but all operate within the risk management framework to ensure that it does not affect the stability of the banks.

SVB crisis lesson, banks must avoid high-risk deposit structures

Lynch mentioned cases of Silicon Valley Bank (SVB), Signature Bank, and First Republic Bank collapsing in 2023, pointing out that at that time some large Cryptocurrency issuance entities had huge deposits, and the collapse of these institutions exacerbated the bank run. Powell stated that the problems of these banks not only come from Cryptocurrency risks, but a bigger factor is the banks' poor risk management, such as holding a large amount of long-term bonds but failing to effectively hedge interest rate risks, and over-reliance on uninsured large deposits.

Powell further stated that after the closure of Silicon Valley Bank, regulatory agencies have strengthened the risk monitoring of banks, paying particular attention to whether the deposit structure is overly concentrated in certain types of customers, such as venture capital funds or encryption operators. He emphasized that the FED's goal is to ensure the stability of the banking system and prevent similar bank runs from happening again.

Enhance bank stability, continue to monitor the impact of Crypto Assets

Powell concluded by stating that future regulators need to learn from the Silicon Valley bank crisis to ensure that banks have more stable sources of funding and to strengthen the management of interest rate and liquidity risks. He emphasized that the FED will not prevent banks from collaborating with legitimate encryption businesses, but banks must carefully assess the associated risks to ensure that their stability is not affected by the volatility of the cryptocurrency market.

(FED Powell: Banks can serve cryptocurrency businesses, provided that the risks are controllable)

This article FED Chairman Powell: Banks can legally carry out encryption businesses, do risk control well and learn from the SVB lesson first appeared in Chain News ABMedia.